Arkansas Incentives | Finance, Loans, IRB, Workforce Development

FINANCING & GRANTS

Amendment 82 Bond Financing: Recognizing the importance of economic development and the tools necessary to be competitive in the global market for jobs and investment, Arkansans passed Amendment 82 to the Arkansas Constitution in 2004 authorizing ADFA to issue general obligation bonds for major economic development projects approved by the Arkansas General Assembly. These projects may include, but are not limited to: land acquisition; site preparation; road and highway improvements; rail spur construction; water service; wastewater treatment; employee training which may include equipment for such purpose; environmental mitigation; and training and research facilities and the necessary equipment therefore.

Bond Guaranty Program: Under the Bond Guaranty Program, the Commission “guarantees” timely payment of principal and interest, up to $5 million principal per bond issue, to the bondholders. This guaranty gives the bonds a better rating, thereby making the bonds more attractive to investors and reducing the company’s cost to borrow money. The Commission charges a one-time upfront 5% fee for guaranteeing bond issues. The applicant must demonstrate to the Commission:

They can make the required debt-service payments.

The project provides substantial employment opportunities to Arkansans as a direct result of the project.

The Arkansas Development Finance Authority (ADFA) also provides a bond guaranty program that enables a company to obtain competitive, fixed interest rates. The total amount ADFA can guarantee is up to $6 million per borrower; therefore, a business could obtain up to $11 million per project through combining the guaranty programs of ADFA and AEDC. ADFA has the capacity to issue bonds for a single project or for several projects on a pooled basis. The pooled or composite issue allows small businesses needing financing for fixed assets to take advantage of low interest financing and to share the costs for issuing bonds, an option which gives more financing opportunities which otherwise would not be available. ADFA can also provide interim financing to approved projects before bond proceeds are available.

Community Development Block Grant (CDBG): CDBG funds may be loaned to eligible businesses for fixed-asset financing on projects that create jobs for low-to-moderate income families. Examples of eligible activities for this Set-Aside Loan Program include acquisition of property, purchase of equipment, leasehold improvements and construction or expansion of buildings or physical plants. Loans are provided at competitive interest rates with flexible repayment terms. Under this program, job creation is required and 51% of the new jobs must benefit low-to-moderate-income persons. This means that 51% of the new positions should be made available to those persons without substantial work experience or education beyond high school.

Industrial Revenue Bonds (IRBs): Commonly known as “Act 9 Bonds” in Arkansas, IRBS provide eligible existing companies with competitive financing options for property, plant and equipment expenses. Under Arkansas Act 9 of 1960, cities and counties are authorized to issue IRBs to benefit private companies. Because Act 9 IRBs do not obligate cities or counties to make payment except from project income, the bonds must be underwritten on the financial strength of the company or guaranteed by the Arkansas Economic Development Commission and/or the Arkansas Development Finance Authority.

Interest on tax-exempt issues is normally 80% of prime, but may vary depending on terms of the issue. The primary goal is to enable manufacturers to purchase land, buildings and equipment to expand their operations. In addition to tax-exempt IRBs, taxable IRBs may be used for eligible existing businesses at long-term fixed rates and for manufacturing projects that exceed $20 million in capital costs or do not meet other federal guidelines relative to tax-exempt bond financing. Tourism attractions and facilities may also qualify for taxable bonds. Businesses that use either tax-exempt or taxable IRB financing can negotiate with the local community for property tax relief for eligible businesses in the form of Payment in Lieu of Tax Agreement (PILOT Agreement).

Tax-Exempt Bonds: Regulated by the IRS Code and any prospective borrower must meet basic requirements to use tax-exempt bonds to finance the project, including but not limited to: The firm must be engaged in manufacturing, processing or other activities directly supporting or related to manufacturing or processing. The project must be for expansion or acquisition of fixed assets that are needed for the manufacturing process. The business’s total outstanding tax-exempt bond debt nationwide cannot exceed $40 million. The total capital cost may not exceed $20 million for a six-year period.

Taxable Bonds: Can be issued for projects not eligible for tax-exempt status. Cities, counties or ADFA may issue taxable bonds with no dollar limitation for the acquisition of land, building and equipment for manufacturing, warehousing, distribution, and corporate and management offices for industry. The issuer may then lease the property to a private company. Qualified borrowers are not limited to manufacturing companies. There are no capital expenditure limitations as there are with tax-exempt bonds. It is possible to finance the acquisition of used equipment with taxable bonds

TAX INCENTIVES

Advantage Arkansas (Income Tax Credit): Advantage Arkansas offers a state income tax credit for job creation based on the payroll of new, full-time, permanent employees hired as a result of the project. In order to qualify for the Advantage Arkansas program (all tiers), the proposed average hourly wage of the new employees hired as a result of the project must be equal to or greater than the lowest county average hourly wage. Currently, the average hourly wage threshold for the Advantage Arkansas program is $11.05.The Advantage Arkansas income tax credit is earned each tax year for a period of five years. The income tax credit cannot offset more than 50% of a business’ income tax liability in any one year and may be carried forward for nine years beyond the tax year in which the credit was first earned. The credit begins in the tax year in which the new employees are hired. Employees included in the new additional payroll under the project must be Arkansas taxpayers.

ArkPlus (Income Tax Credit): ArkPlus is a state income tax credit program that provides tax credits of 10% of the total investment in a new location or expansion project. This discretionary incentive is offered in highly competitive situations. ArkPlus requires both a minimum investment and a minimum payroll of new, full-time, permanent employees hired as a result of the project, depending on the tier in which the business locates. Total project expenditures must be incurred within four years of the date the project is approved by AEDC. New, full-time, permanent employees must be hired within 48 months of the date the financial agreement is signed. The income tax credits may be used to offset 50% of the Arkansas income tax liability in the tax year the credit is earned. Any unused credits may be carried forward for nine years beyond the tax year in which the credit was first earned.

Digital Production/Film Requirements: Prior to beginning preproduction activities in Arkansas, register with the film office and submit an application along with an estimate of expenditures; meet the minimum spending requirement of at least $50,000 within a six-month period in connection with a postproduction project or $200,000 within a six-month period in connection with the production of one project; and apply for a production rebate certificate no later than 180 days after the last production expenses are incurred. Qualified spending includes costs incurred in Arkansas in the development, preproduction, production or postproduction of a qualified production; the first $500,000 of wages or salaries paid to each resident and nonresident that are subject to Arkansas income taxes; pension, health and welfare contributions; and stipends and living allowances. Payments for production and postproduction expenses are recommended (but not required) to be made from the checking account of an Arkansas institution. Cash payments to vendors may not exceed 40% of the total verifiable costs.

Summary: Each project submitted for funding under this program is evaluated on a case-by-case basis. An eligible production company may earn a 20% rebate on all qualified production expenditures in Arkansas. Salaries and wages paid to resident and nonresident above-the-line employees, as well as resident and nonresident below-the-line employees, will qualify for the 20% rebate and an additional 10% may be earned on the payroll of below-the-line employees who are full-time Arkansas residents for a total rebate of 30% on such wages. Below-the-line does not include directors and producers but for purposes of the additional 10%, resident actors and writers are defined as below-the-line. The incentive program is scheduled to sunset on June 30, 2019.

Equity Investment Tax Credit: A a discretionary incentive targeted toward new, technology-based businesses paying wages in excess of the state or county average wage. If offered, this program allows an approved business to offer an income tax credit to investors purchasing an equity investment in the business.The income tax credit/credits issued under this program are equal to 33 1/3% of the amount invested by an investor in an eligible business. The income tax credit earned may be used to offset 50% of the investor’s Arkansas income tax liability in any one tax year. Any unused credit may be carried forward for a period of nine years. The income tax credit earned may be sold upon approval by AEDC.

Research and Development (R&D) Tax Credits and Incentives: Intended to provide incentives for university-based research, in-house research and R&D in start-up, technology-based enterprises. Tax credits under these programs may be carried forward for nine years and may offset up to 100% of a business’ tax liability in a given year.

In-House R&D: New and existing eligible businesses that conduct “in-house” research that qualifies for federal R&D tax credits may qualify for in-house research income tax credits. The credit allowed is 20% of qualified research expenditures that exceed the base year, for a period of three years and the incremental increase in qualified research and expenditures for the succeeding two years. For a new in-house research facility, the base year is zero. Therefore, in the first three years following the date of the financial incentive agreement, all eligible expenditures can qualify for the credit.

In-House Research by a Targeted Business (Act 182 of 2003 § 15-4-2708(c)): Targeted businesses, at the discretion of the AEDC Executive Director, may be offered income tax credits equal to 33% of the qualified R&D expenditures incurred each year for up to five years. The application for this income tax credit shall include a project plan, which clearly identifies the intent of the project, the expenditures planned, the start and end dates of the project and an estimate of total project costs.

R&D in Area of Strategic Value: The Strategic Value R&D incentives are for qualifying businesses that invest in: 1) in-house research in an area of strategic value; or 2) a R&D project offered by the Arkansas Science and Technology Authority. Research in an area of strategic value means research in fields having long-term economic or commercial value to the state, and that have been identified in the research and development plan approved from time to time by the Board of Directors of the Arkansas Science and Technology Authority. The income tax credit is equal to 33% of qualified research expenditures. The maximum tax credit that may be claimed by a taxpayer under this program is $50,000 per tax year.

University Based R&D: An eligible business that contracts with one or more Arkansas colleges or universities in performing research may qualify for a 33% income tax credit for qualified research expenditures.

Qualified research expenditures include in-house expenses for taxable wages paid and supplies used in the conduct of qualified research. Qualified research must satisfy all of the following tests in order to qualify:

The activity must be undertaken for the purpose of discovering information which is technological in nature;

The application of technological information must be intended to be useful in the new or improved business component; and

Substantially all of the activities related to the research effort must constitute elements of a process of experimentation relating to a new or improved function, performance, reliability or quality.

Income tax credit for R&D earned by targeted businesses may be sold. The business must make application to AEDC for the sale of credits earned under this section. Upon application and approval by AEDC, the business may sell earned income tax credits. A targeted business earning R&D tax credits is prohibited from earning job creation tax credits, as authorized by § 15-4-2709 or research tax credits as authorized by § 15-4-2708(a), for the same expenditure. The income tax credit for research by a targeted business authorized by 15-4-2708(c) may not be used with:

Other in-house research and development incentives as authorized by § 15-4-2708(b) or § 15-4-2708(d)(1)(A); or

Any other incentive in Act 182 of 2003 (Consolidated Incentive Act of 2003) for the same expenditures.

Targeted Business Incentives: At the discretion of the AEDC Executive Director, targeted businesses may qualify for three special incentives designed to help new, knowledge-based businesses in their early years. These discretionary incentives are for start-up companies in emerging sectors (Advanced materials and manufacturing systems; Agriculture, food and environmental sciences; Biotechnology, bioengineering and life sciences; Information technology; Transportation logistics; and Bio-based products):

A refund of sales and use taxes paid on the purchase of building materials and machinery and equipment associated with the approved project

A transferable income tax credit equal to 10% of payroll for up to five years

A transferable income tax credit equal to 33% of eligible research and development expenditures

Companies must be less than five years old; have an annual payroll between $100,000 and $1 million; show proof of an equity investment of at least $250,000; pay at least 150% of the lesser of the state or county average hourly wage where the business is located; and meet requisite payroll thresholds. Additional eligibility criteria may be required for individual targeted programs (sales and use tax refund for targeted businesses, payroll income tax credit for targeted businesses, payroll rebate for targeted business and targeted ArkPlus)

Tax Back (Sales and Use Tax Refund): The Tax Back program provides sales and use tax refunds on the purchase of building materials and taxable machinery and equipment to qualified businesses investing at least $100,000 and who either a) sign a job creation agreement under the Advantage Arkansas or Create Rebate programs within 24 months of signing the Tax Back agreement or b) have met the requirements of an Advantage Arkansas or Create Rebate agreement within the previous 48 months.Applicants for Tax Back must also obtain an endorsement resolution from a local governing authority authorizing the refund of its local taxes. Applicants must meet the qualification criteria under the requisite Advantage Arkansas or Create Rebate program in which they are participating and must be approved by AEDC.The refund of sales and use taxes shall not include the refund of taxes dedicated to the Educational Adequacy Fund provided in §19-5-1227 or the taxes dedicated to the Conservation Tax Fund provided in §19-6-484; which totals 1%. The state tax rate is 6.5% so the eligible refund would be 5.5%.

Tourism Development Incentives: The Arkansas Tourism Development Act provides state sales and use tax credits and income tax credits to businesses initiating approved tourism attraction projects.Sales tax credits shall be determined in accordance with the following criteria:

Eligible minimum project costs must be $1 million, except in high unemployment counties,* where it is $500,000.

The sales tax credits are calculated based upon 15% of eligible project cost for projects spending more than $1 million; credits are 25% of eligible project cost for the projects in high unemployment counties.*

The sales tax credit may be applied against the business’s increased sales tax liability that results from the project.

Other review criteria may be requested by AEDC to determine whether the tourism attraction project meets the intent of the Act.

Additionally, eligible businesses may receive a state income tax credit equal to 4% of the annual payroll of new, full-time, permanent employees. The income tax credits begin in the year in which the new employees are hired. Any unused portion of the credit may be carried forward against corporate income tax for the succeeding nine years.

WORKFORCE DEVELOPMENT

Business and Industry Training Program (BITP): The BITP program recruits workers, provides pre-employment training and on-the-job training for new and expanding business and industry. Eligible businesses include manufacturing firms, national and regional corporate headquarters, distribution centers, intermodal facilities, knowledge-based companies, biotechnology companies, office sector businesses and scientific & technical services.

Existing Workforce Training Program (EWTP): The EWTP program provides financial assistance to Arkansas’ eligible businesses for upgrading the skills of the existing workforce to remain competitive and economically viable. Training is for full-time, permanent employees who work at least 30 hours a week and are subject to Arkansas’ personal income tax. Reimbursements are calculated according to a set of scoring criteria.

OTHER INCENTIVES

Create Rebate (Cash Rebate): Incentives are negotiated and offered at the discretion of the Executive Director of the Arkansas Economic Development Commission (AEDC). Create Rebate provides annual cash payments based on a company’s annual payroll for new, full-time, permanent employees. In order to qualify, the company must create a minimum of $2 million annually in new payroll. The minimum payroll must be met within 24 months of the effective date of the financial incentive agreement. No benefits may be claimed until the $2 million annual payroll threshold is met.

Create Rebate benefits are available after the business certifies to the Arkansas Department of Finance & Administration that it has fulfilled the minimum payroll requirements and the reported payroll has been verified. The percentage of the benefit depends on the tier assignment of the county where the job creation occurs.

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